What's a Living Trust? Examples + Cost Explained

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A living trust (also called an “inter vivos” trust) is a legal document you create during life that gives legal title of specific assets to a designated person (a “trustee”) for the ultimate purpose of benefiting someone else (a “beneficiary”).

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A living trust is a common estate planning tool with many benefits, which makes it an attractive resource for many people as a way of supplementing or replacing a will. A living trust is a tool that can operate during your life (“inter vivos”) or after your death (“testamentary”), or both. 

What is a Living Trust? 

A living trust is a legal tool for transferring property out of your estate to someone else, who will invest the property for the benefit of a named beneficiary. There are many benefits to having a living trust.

One important benefit is that even though you have given your property’s legal title to the trustee, you can limit what the trustee does with it. In fact, a trustee has a legal obligation to use the property only in a way that benefits the person you name as the beneficiary, and only in the way that you want him or her to benefit.

For example, suppose you want to give your seven-year-old granddaughter $1,000 to help her pay for her college education, but you suspect that you may not live long enough to see her go to college. What is the best way to accomplish this but still benefit?

Give a gift. One option is simply to hold the $1,000 until your granddaughter goes to college. You can put the $1,000 in an envelope and keep it in a safe place until she needs it. You can even put the $1,000 in a savings account and earn a little interest on it. If you are alive when your granddaughter is ready to go to college, you can give it to her as a gift.

  • That’s one way of doing it, but it may not be the best way.
  • What if you die before she goes to college? How will she get your $1,000?
  • How will anyone know where you put your $1,000?
  • Even if you tell someone where the $1,000 is located, how do you know that person will give it to your granddaughter?

Use a last will and testament. A better solution might be to leave your granddaughter $1,000 in your will. A will is a very common estate planning tool that will accomplish this goal. A will can solve all the problems associated with waiting to give your granddaughter her gift:

  • If you die before she goes to college, the court will give your granddaughter $1,000 from your estate when it probates your will.
  • At the very least, the attorney who drafted your will knows where you kept your granddaughter’s $1,000.
  • Your attorney is legally obligated to see that your $1,000 goes to your granddaughter.

A will sounds like a much better way to transfer property. However, is it the best way?

  • When you die with a will, that $1,000 is still part of your estate. Depending on the size of your estate, you may have to pay estate and gift taxes on that $1,000 and other taxes. You may have to pay a tax attorney.
  • You also may have to pay an attorney to write your will.
  • You’ll pay the court to probate your will and an executor to administer your will. Having a will can be expensive.
  • What if you die and your granddaughter gets your $1,000 in your will, but she decides not to go to college? You can’t take it back.
  • What if your granddaughter intends to use your $1,000 for college, but she develops a gambling problem or a drug habit? How can you be sure she will use your $1,000 for college?

Maybe there’s an even better solution. There is — it’s a revocable living trust.

Irrevocable vs. revocable living trusts

You can make any living trust “revocable” or “irrevocable.” When you make a living trust revocable, you still give your property to a trustee for the benefit of a beneficiary, but you can always change your mind and take it back — you can revoke it. How? 

By including the option to revoke the trust in its terms. That is an enormous benefit if your granddaughter passes away before she goes to college, decides not to go to college, or earns a full scholarship that will pay for her college. Now, you can revoke your trust and use the $1,000 to benefit someone else.

When you make a living trust irrevocable, it means that you agree in the terms of the trust that you cannot amend or revoke the trust and take back the $1,000.

You might wonder why you would ever make a living trust irrevocable, but there are other benefits to doing that, such as protecting the property from creditors (this is called an “asset protection” trust). Because you have transferred the $1,000 out of your estate and have surrendered all control over the property (remember that the trust now owns the $1,000), your creditors cannot reach it.

If your trust is revocable or you name yourself as the trustee of your trust, however, it will not protect your property from your creditors, because you still control the assets in the trust.  

One of the benefits of having a living trust instead of a will is that you can make it revocable or irrevocable, depending on your needs and the needs of your beneficiaries. 

Difference between a living trust and a will

A will is also revocable, so you may be thinking, “Then why not just have a will?” But a will does not become “irrevocable” until you die. So, with a will, you cannot obtain the benefits of irrevocability before you die. 

There are many other, important differences between a living trust and a will. For example:

A living trust is “living”

It is alive. It operates. It becomes effective now, during your life.

Although you can use it to transfer property upon your death, you can benefit from the trust during your life by naming yourself as a beneficiary of the trust. Provided you do not name yourself as the trustee and also the sole beneficiary, this is permissible.

A trust avoids probate

As described above, having a will and, therefore, having to go through the probate process can be expensive and can take a long time.

One important difference between a living trust and a will is that a living trust does not go through probate. Your trustee or successor trustee can administer the trust without court involvement. This can save a lot of money.

Also, a court can take months — even years — to fully administer your estate, whereas a trustee can distribute your property almost immediately. 

A trust is a private document

Did you know that when you probate your will, it becomes a public document? Anyone can walk into the courthouse and read your will.

However, a trust is a private document. No one even knows what is in it except the trustee and the beneficiaries. This may not be that important to some people, but you may not want your children or other relatives to know how much money you had or that you entrusted most of your estate to a charity that was important to you. A trust offers privacy. 

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Advantages and Disadvantages of a Living Trust

As with anything, there are pros and cons to a living trust. They’re outlined below.


Although a will offers many benefits, all of the things that make a living trust different from a will are still advantageous:

  • It can be revocable or irrevocable.
  • It can operate during life.
  • It avoids probate.
  • It is a private document.

However, there are many other advantages to a living trust. For example:

It can have tax benefits

It’s true that many people do not have a trust large enough to benefit from the federal estate tax savings that a large trust can offer because the annual estate tax exemption is usually larger than most individual trusts. If you die in 2020, for example, you would only owe federal estate taxes if your estate exceeded $11.58 million. This exemption amount is subject to increase every year. 

When the federal estate tax exemption was lower and trusts were more advantageous as a tax benefit for more people, a common type of trust for married couples was an “AB trust,” which was designed to let a surviving spouse benefit from any unused exemption amount that a deceased spouse did not use.

However, because the exemption amount has increased so significantly and new "portability" laws allow spouses to accomplish the same thing, AB trusts are less inviting as tax savings. However, for trusts that exceed the federal estate tax exemption, tax savings can be a significant benefit.

It can reduce the total value of your taxable estate

With certain types of trusts, such as irrevocable asset protection trusts and life insurance trusts, you can reduce the gross value of your taxable estate with the property that you have transferred to the trust.

Although this can also incur other taxes, this can be especially important when trying to “spend down” at the end of life to qualify for federal benefits for long-term care. A “special needs trust” also can be established for a disabled beneficiary without disqualifying the beneficiary for federal benefits.

Trusts allow you to transfer property with discretion

By creating a “discretionary trust,” you can authorize your successor trustee to exercise discretion about the distribution of the trust property to beneficiaries. This allows the trustee to withhold distributions based on your wishes.

If your granddaughter wants an income distribution from your college fund trust, your trustee can exercise discretion as to whether your granddaughter needs the money for college. If not, the trustee can refuse the request for distribution. These are also known as “spendthrift” trusts. 


The value of a living trust depends on what advantages you are trying to gain and what disadvantages you are trying to avoid. For example:

Not all trusts will protect your assets from creditors

This depends on how much control of the assets you are willing to sacrifice.

Trusts are not necessarily a good resource for tax savings

This depends on the total value of the trust, the applicable exemption amount, and the amount of income gained from the trust that is subject to income taxation.

Trusts can be expensive

As tax laws become more and more complicated, so do the trusts that seek to avoid them. In theory, trusts are very simple but can be extremely detailed and complex. You probably need to pay an attorney to create one.

Also, in many jurisdictions, the trustee and any attorneys involved in representing the trust or the trustee are paid a percentage of the value of the trust. Depending on the value, this can be quite expensive.

As you can see, a trust’s advantages can be disadvantages as well; it just depends on what you are trying to accomplish.

How Do Living Trusts Work? 

Trusts work by allowing someone to:

  • Dispose of assets in a way that benefits someone else, but still controls whether, when, and how those benefits are distributed.
  • Give a trustee legal title to assets so that the trustee can distribute the assets and still be held accountable for abiding by the terms of the trust. 
  • Enjoy the benefits of the trust assets while still alive but provide for loved ones after death. 

How Much Does a Living Trust Cost to Set Up and Administer?

There are a host of factors that dictate how expensive creating and administering a living trust can be. These factors can include a trust’s:

  • Complexity
  • Value
  • Terms 
  • Duration

Factors also include:

  • Whether someone contests the validity of the trust
  • Asserts a claim that the trustee breached fiduciary duties
  • Whether the interests of two different beneficiaries conflict (such as income and remainder beneficiaries)
  • Whether the directives or wishes of the settlor (called “pecuniary” interests) conflict with what will benefit beneficiaries (such as when the value of trust stock is diminishing but the settlor directs not to sell the stock)

Living Trust FAQs

No matter what kind of living trust you’re considering, there are some questions common to the considerations of most types of trusts. Here are some answers to those common questions:

How do taxes work in a living trust? 

A living trust can garner some tax savings because when assets are placed in a trust, they become the legal property of the trust, which may be taxed at a lower rate than the individual rate of the settlor.

However, any income that the trust earns to which the settlor has access will be taxed as income to the settlor.

Are there any assets you should avoid putting in a living trust?

Yes. There are some assets that you cannot or should not transfer to a trust.

  • Qualified retirement accounts (like 401(k)s, 403(b)s, and IRAs), and qualified annuities: These should not be transferred to a trust because the transfer will be treated as a complete withdrawal of funds from the qualified account, and you will have to pay income tax in the year that you transfer the funds.
  • Vehicles: For similar reasons, you may want to avoid transferring a vehicle into a trust because the transfer may be viewed as a sale of the vehicle and taxed accordingly. 
  • Life insurance policies: Likewise, a transfer of life insurance into a trust can be taxed as income. Instead, the trust can be named as the primary beneficiary of the policy and will not be subject to the same taxes. 
Can you amend a living trust?

Yes, provided the trust is revocable. A settlor is always free to change the terms of a revocable trust or name different beneficiaries or trustees.

If it is revocable, a trustee can terminate the trust completely. If the trust is irrevocable, the settlor has no ability to exercise control over the trust assets.

Be Careful How You Use a Trust 

A living trust has many advantages and disadvantages. It can be a double-edged sword and can cut both ways at the same time. Before you execute a trust, you must be sure you know how it works and the proper way to use it.

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